Archive for the ‘Morgan Keegan’ Category

Raymond James is nearing an agreement to buy Region’s Morgan Keegan brokerage unit for about $930 million in cash. Raymond James may tap Morgan Keegan Chief Executive Officer John Carson as its president and head of fixed income according to news reports. Adding Morgan Keegan would bring Raymond James one of the top underwriters of U.S. municipal bonds and would expand its retail brokerage network, placing it among the nation’s biggest firms. Raymond James has about 5,100 financial advisers compared with 1,200 at Morgan Keegan. Regions plans to collect a $250 million dividend from Morgan Keegan before the sale, boosting the amount of cash proceeds to about $1.2 billion.

Buyout firms circling Regions Morgan Keegan brokerage unit lowered bids by at least $200 million after financing markets deteriorated and MF Global Holdings Ltd. filed for bankruptcy, according to people with direct knowledge of the process.

Thomas H. Lee Partners LP and Jeffrey Greenberg’s Aquiline Capital Partners LLC submitted the highest offer at about $750 million, the people said, asking not to be named because the talks are private. The group topped a joint bid from Carlyle Group LP and Blackstone Group LP, according to the people, who said previous offers valued the unit at more than $1 billion.

A deal hasn’t been reached and talks could fall apart as Regions is pushing both groups to raise their price, the people said. Regions, based in Birmingham, Alabama has been planning to use proceeds from the sale to boost capital and pay back a $3.5 billion U.S. bailout. Regions has indicated it plans to collect a $250 million dividend from Morgan Keegan prior to any sale, increasing proceeds from the business, the people said.

The SEC alleges that Morgan Keegan misrepresented to customers that ARS were safe, highly liquid investments that were comparable to money market funds. Morgan Keegan sold approximately $925 million of ARS to its customers between Nov. 1, 2007, and March 20, 2008, but failed to inform its customers about increased liquidity risks for ARS even after the firm decided to stop supporting the ARS market in February 2008.

“Morgan Keegan was clearly aware that the ARS market was deteriorating, but it went so far as to actually accelerate its ARS sales even after other firms’ ARS auctions began to fail,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “As we’ve done in our enforcement actions against other firms, the SEC is firmly committed to restoring liquidity to Morgan Keegan customers who purchased ARS.”

The SEC’s complaint, filed in U.S. District Court for the Northern District of Georgia, alleges that Morgan Keegan ignored indications that the risk of auction failures had materially increased amid investor concerns about the creditworthiness of ARS insurers, auction failures in certain segments of the ARS market, increased clearing rates for auctions managed by Morgan Keegan and other broker-dealers, and higher than normal ARS inventories at Morgan Keegan.

The SEC is seeking an injunction against Morgan Keegan for violations of the antifraud provisions of the federal securities laws, as well as disgorgement, financial penalties, and other equitable relief for investors.

The SEC appreciates the assistance and cooperation of the Alabama Securities Commission and the New York Attorney General’s Office.

The Morgan Keegan bond mutual funds are “worst in class” at a time when the phrases “subprime crises” and subprime lending” have become household words and moved from the financial news to mainstream news. In 2007, the funds lost 50 percent or more of their value, while other funds in their peer group either had positive returns or losses of 8 percent or less.

Of 439 other intermediate bond funds and 253 other high-income bond funds, none suffered losses of this magnitude.

Investors in various Morgan Keegan Bond Funds have suffered huge losses over recent months. Many of these Morgan Keegan Bond Funds have experienced losses in their net asset values of more than 50% since the beginning of 2007, most of these losses coming in the past five months.

Specifically, the following Morgan Keegan Bond Funds have been adversely impacted:

All of these funds are managed by Morgan Keegan Asset Management Inc. and James C. Kelsoe. The abysmal performance of these funds is largely attributable to management’s decision to concentrate the funds’ investments in high risk mortgage- backed securities and CDOs. Recent Bloomberg reports on these funds establish that mortgage-backed securities and CDOs constituted more than 50% of each funds portfolio. This investment strategy appears to have been highly imprudent in light of the many concerns about the mortgage-backed securities and CDO markets that existed in 2005 and 2006.

Last week, an Indiana charity that “makes wishes come true” for children with life threatening illnesses filed arbitration claims over sub-prime related losses it allegedly suffered in a bond fund managed by Regions Morgan Keegan. The Indiana Children’s Wish Find claimed that it lost $48,000 or 22% of its $220,000 investment in the Regions Morgan Keegan Select Intermediated Bond Fund.

The Wish Fund claims that it was misled by Morgan Keegan concerning the level of risk it assumed by investing in the fund. According to the Wish Fund Regions Bank, an affiliate of Morgan Keegan suggested that the Wish Fund move money from it’s money market account into the bond fund. Regions Bank allegedly represented that the bond fund was an appropriate low risk alternative to a CD. The Wish Fund alleged that the bond fund was heavily invested in risky-low rated mortgage debt.

Three fixed-income funds offered by Morgan Keegan & Co., whose assets have been difficult to price because of the subprime mortgage crisis, still cannot file annual reports, a spokeswoman said on Monday.

Morgan Keegan, a unit of Regions Financial Corp., said on Aug. 30 it was seeking a 15-day extension to file the annual reports with the Securities and Exchange Commission.

The challenge of pricing assets in volatile markets has led to further delays, said Kathy Ridley, a spokeswoman for Morgan Keegan. The funds held mortgage- and asset-backed securities.
“While this valuation process has taken longer than expected, significant work has been done and everyone involved is continuing to work diligently to complete the filings as soon as possible,” Ridley said in an e-mail.

The three funds had net assets of about $2.3 billion as of March 31. But the Select High Income Fund has experienced significant redemptions, Morgan Keegan said in a supplement filing to the fund’s prospectus on Aug. 13.

As of Thursday, Sept. 13, the Select High Income Fund, which had $1.2 billion in assets in March, was down almost 32 percent in the third quarter and almost 34 percent year to date, according to Lipper Inc., a unit of Reuters Group Plc.

The lack of liquidity in the fund’s securities could result in the fund incurring greater losses on the sale of some its securities than under more stable market conditions, Morgan Keegan said in the supplement filing.

Once Morgan Keegan has finished its valuation process, the brokerage said it would move quickly to communicate directly with shareholders as well as through the RMK Funds Web site.

Jim Kelsoe, a top-ranked junk-bond fund manager since 2000, dropped to last place this year because of losses tied to mortgages for people with poor credit.

Kelsoe’s $1.1 billion Regions Morgan Keegan Select High Income Fund fell 4.2 percent from the beginning of 2007 as defaults on subprime home loans reached a five-year high. The mutual fund had 15 percent of assets in the subprime market and at least the same amount in other mortgage debt in May.

The High Income fund got a boost from the holdings for seven years and now “it’s very easy to be critical” of the investment decision, Kelsoe said in an interview from his office at Morgan Asset Management Inc. in Memphis, Tennessee. The fund had as much as 25 percent of assets in subprime-related securities in 2005.

Kelsoe’s fund ranks last of 93 high-yield rivals and it’s the eighth-worst performer this year of more than 550 U.S.-based bond funds tracked by Bloomberg. Losses accelerated in June after the collapse of two hedge funds run by Bear Stearns Cos. partly because of bad bets on bonds linked to subprime mortgages.

The $1 billion Regions Morgan Keegan Select Intermediate Bond Fund, which Kelsoe manages, also is the worst in its class, down 2.1 percent this year including reinvested dividends.

“A lot of mutual funds didn’t own much of this stuff,” said Lawrence Jones, an industry analyst at Chicago-based research firm Morningstar Inc., referring to the subprime market. The Morgan Keegan fund “is the one real big exception.”

The 44-year-old Kelsoe said that, like fund managers drawn in by Internet stocks at the start of the decade, an “intoxication” with high-yield subprime investments kept him from pulling out completely. Subprime mortgage bonds rated BBB, or investment grade, yielded 2.05 percentage points more than benchmarks in February, compared with 1.53 percentage points for BB-rated, or junk, corporate bonds, according to JPMorgan Chase & Co. in New York.

Morningstar cut its rating on Kelsoe’s High Income fund this month to three stars from four stars, citing above-average risk and underperformance. The highest grade is five. The fund has a one-year Sharpe ratio of minus 0.9, compared with 1.86 for its peers. A higher ratio means better risk-adjusted returns.

The average high-yield fund has gained 2.9 percent this year, according to Morningstar. The top-performing $4.1 billion Pioneer High Yield Fund, run by Andrew Feltus at Boston-based Pioneer Investment Management Inc., has gained 9 percent.

Kelsoe, who has worked at Morgan Keegan for the past 16 years, favors bonds backed by assets such as aircraft leases, and mortgage loans, as well as collateralized debt obligations, or CDOs, instead of corporate bonds, which made up only 21 percent of the fund in March. The $9.5 billion Vanguard High- Yield Corporate Fund, by contrast, has 92 percent of its assets in corporate bonds last month.

The strategy helped Kelsoe avoid getting pummeled by companies dragged down by concerns about accounting scandals at energy trader Enron Corp. in 2001 and phone company WorldCom Inc. the next year. A large part of his outperformance in recent years came from purchases of beaten-down aircraft-lease bonds after the Sept. 11, 2001, terrorist attacks, Morningstar’s Jones said.

Kelsoe, who graduated from the University of Alabama in Tuscaloosa, started managing the High Income fund in 1999. Morgan Asset Management is a unit of Birmingham, Alabama-based Regions Financial Corp.

Kelsoe’s fund rose 17 percent in 2000, 18 percent the next year and 11 percent in 2002, outperforming 99 percent of its competitors. Since the start of the decade, the fund climbed at an average annual rate of 12 percent, compared with 2.2 percent for the Standard & Poor’s 500 Index of U.S. stocks.

The fund is declining this year amid surging delinquencies on mortgages that may cause bond investors to lose about $100 billion in principal, according to estimates from analysts at New York-based Citigroup Inc.

Kelsoe had $4 million at the end of last year in a security backed by second mortgages that Goldman Sachs Group Inc. created in January 2006. The bond was downgraded twice this year by Moody’s Investors Service to the lowest rating.

Another holding was an unrated piece of a CDO overseen by Deerfield Capital Management LLC that was sold a year ago by Royal Bank of Scotland Group Plc. The $4.8 million security, which a semi-annual report listed with a 15 percent coupon, is mostly backed by subprime and “mid-prime” mortgage securities.

Today, the Wall Street Journal reported that the credit crunch is starting to hit some bond mutual-fund investors in unexpected ways, some are now taking legal recourse for losses in their investments.

In the most recent instance, an Indiana charity filed an arbitration complaint against Memphis, Tenn., broker-dealer Morgan Keegan & Co. unit of Regions Financial Corp., for an alleged misrepresentation in selling a bond mutual fund. The fund has lost nearly half of its value this year.

The complaint comes on the heels of a lawsuit filed in a federal court in Manhattan in October over an institutional bond fund of State Street Corp., which alleged that the fund invested in “high risk” investments. A State Street spokeswoman has denied that the firm incorrectly communicated the investment objective of the fund.

In its arbitration complaint, the Indiana Children’s Wish Fund says that it invested around $220,000 in the Regions Morgan Keegan Select Intermediate Bond Fund, on the understanding that it was a relatively safe investment. The complaint was filed with the Financial Industry Regulatory Authority last month.

A Morgan Keegan spokeswoman said via email: “We will respond to the Wish Fund’s complaint in due course through the established arbitration process. … We are confident the arbitration process will result in an appropriate outcome.”

The Wish Fund, which grants the wishes of children who are diagnosed with life-threatening illnesses, made the investment based on the recommendation of an agent of Regions Bank who met the Wish Fund’s executive director, Terry Ceaser-Hudson, in June this year. According to the complaint, the agent suggested that moving the Wish Fund’s money “from a money market account and certificate of deposit investments into his recommended investment was completely safe and a smart business decision.”

The Intermediate Bond Fund was hit hard amid the turmoil in the credit markets since this summer, as many of fund’s investments in mortgage-backed and other asset-backed securities couldn’t find buyers. The fund also had redemptions from investors, which forced the managers to sell in a down market and reduced the value of the portfolio.

The fund is currently down around 45% since the start of the year, the worst performer in the intermediate-term bond-fund category of funds, according to research firm Morningstar Inc. The average fund in this category is up 5% since the start of the year. In late September, the Wish Fund’s investment in the Morgan Keegan fund was liquidated at a loss of approximately $48,000 or about 22% of the invested money, says the complaint. “The presentation to the Wish Fund was that this was an appropriate CD alternative, and nothing could be further from the truth,” says Thomas Hargett, a partner with Maddox Hargett & Caruso PC in Indianapolis who represents the charity.

The Intermediate Bond fund’s Web site says that it may invest in mortgage and other asset-backed securities, and that it may invest up to 35% of its assets in securities that are below investment-grade. As of Sept. 30, the fund invested 11% of its portfolio in securities rated BB+ or lower. In a letter to shareholders late last month, fund manager Jim Kelsoe said that “we will do our best to navigate the portfolios through these difficult times.”

Another fund managed by Mr. Kelsoe, the RMK Select High Income fund, has been the worst performer in the category of high-yield or “junk” bond funds. The fund is down 55% since the start of the year, as opposed to a 1.15% return of the average high-yield bond fund, according to Morningstar.

Meanwhile, in the State Street case, one company sued the firm over the State Street’s Intermediate Bond Fund, an institutional fund. The complainant, New York publishing firm Unisystems Inc., said that the fund’s managers invested in “high risk” instruments and mortgage-backed securities, while representing the fund as a conservative investment option.

The lawsuit alleges that between July 1 and Sept. 1, the fund declined by 25% in value while the index it “purported to track actually increased.”

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